Giving Up Unproductive Debt for Lent
As we celebrate Mardi Gras – world famous for parades, costumes, food, indulgence and decadence – sometimes our minds drift to the origin of the celebration, a last chance for revelry before the 40-day Lent period. As surely as Rex follows Zulu, Ash Wednesday follows Fat Tuesday, and many of us ponder what to give up this year. I usually go with sweets.
This Lent I encourage you to think about giving up unproductive debt. What do I mean by unproductive debt? Some debt, like a mortgage, car loan, small business loan or college loan (although not always – more on this in a later column), can be productive. We pay mortgages in lieu of rent and they help us build up equity in our homes so we can eventually own them free and clear. We pay car loans so we can afford transportation to and from work even if we can’t afford the full price of the car up front. These forms of debt usually carry low interest rates, help us build up good credit and help us fulfill personal and financial goals of home ownership and independence. As long as we can afford the monthly payments, this debt can be a perfectly acceptable part of a financial plan.
So, what types of debt are unproductive? The biggest culprit is credit card debt. Interest rates can be astronomical – 30 percent versus three or four percent for a mortgage! “What’s in your wallet?” In addition, credit card balances have a way of continuing to balloon until the burden starts to feel unbearable.
They say that if you are in a hole, the first step is to stop digging. If you find yourself deep in a credit card debt hole, the first step is to stop making things worse. Set a budget and stick to it. Then try to start paying off a little each month, starting with the card with the highest rate. Some peer-to-peer lending sites allow for debt consolidation so you can refinance your credit card debt at a lower rate, making the burden more manageable. Credit card debt can be toxic since you are not building up any equity. The high interest rate means the balance will keep expanding and that will hurt your credit score.
As bad as credit card debt is, payday loans are even worse. If you are in the payday loan trap, just stop, even if it means rice and beans for 30 days. If you can’t go cold turkey, resolve to reduce the payday loan balance by 30 percent at each renewal.
This Lenten season let’s focus on removing unproductive debt from our lives by trying to pay off our credit cards in full each month and working on a plan to reduce current debt loads. Check out financial literacy events if you need more help.
Happy Mardi Gras!